Monday, December 01, 2014
1:01 AM

I received an interesting email the Wednesday before Thanksgiving from Steen Jakobsen, chief economist for Saxo bank, regarding his macro picture of the world.

I purposely delayed posting it until now so more would see it than during a holiday-truncated week.

From Steen ...

Simple Man's View

One Trading View: Fixed income will outperform all assets. US 10-Year treasury yield will drop under 1.5% by 2015 Q3

One Economic View: Disinflation/deflation will be catalyst for asset sell-off

One Timing View: Q2/Q3-2015 low this cycle for all indicators

One Guaranteed View: Volatility will go up significantly

Core Trading Views

10Y Bond yields(US) will continue lower into Q2-2015. I see acceleration to down-side and mainly in the US where 10 Y could hit 2.00% and bottom out at 1.5% by Q2 as GDP comes off relative to “lift off” consensus.

European factors: Lower than anticipated growth in Germany (China rebalancing, lower US current account deficit and EZ overall) – Impact from Russia crisis only beginning to impact real economy and of course the deflation which ECB promised us would never happen.

China: Despite Reserve Requirement Ratio (RRR) cut the economy is already at 5.0% in real terms and without reform in health care(why people save money), competition (anti-corruption) and deeper capital markets, the marginal change will continue to be negative.

Emerging Market: Strong US Dollar is the last thing the EM market needs. It’s a de facto tightening of monetary policy at a time where “export markets” continue to weaken.

The world is barely surviving at an average yield of 1.5/2.0%. We have two drivers of growth: US and Emerging markets (EM). EM is under pressure as we end 2014 forced into the defensive by lack of reforms, but also a much stronger US Dollar, which means the “mean-reversion” trade is for 2015 is for a weaker US dollar to rebalance towards EM growth as the path of least resistance.

I have no doubt EM becomes major buy sometimes in Q2 when world is off the concept of ever stronger US dollar based on a growth lift-off which is never coming.

US growth has been 2% plus or minus since the financial crisis started, this year it will be 2%- next year? 2% - nowhere close to the 3-4% expected by the markets building on “surveys” and feel good factors. Trust me, as someone who spend too much time traveling this year, the world is worse off, not better.

I meet frustration, lack of access to credit and almost desperation when the question is on asset allocation, but 2015 looks like a year of change. FOMC will definitely continue to sell the “pipe dream” of normalization, BOJ is done and toast.

Why anyone believes printing money will leave Japan better off is a mystery to me.

In closing, I have very little positions – the stock market is on a mission to kill the shorts, which will probably succeed. The FX market believes in Santa Japan, and ECB continues to do nothing but talk, but for now it’s enough to sell the product which is risk on at all costs.

The correction will be deeper and deeper as market is dislocated through zero interest rates and an investor crowd which is rewarded for throwing all conservative risk rules overboard in a year where we again have double digit gains on low interest rates.

Let’s hope ECB plays ball for the market to buy some more time, for now we play musical chairs, and when the music stops more than one chair will be missing.

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